Corporations

Question 1

Duty of loyalty corp

Answer 1

A Director or Officer must discharge her duties in good faith, and with the reason belief that her actions are in the best interest of the corporation. No self-dealing.

Question 2

Duty of Care corp

Answer 2

Director or Officer must discharge her duties by using the care that a person in like position would recently believe, appropriate under the circumstances

Question 3

Business Judgment Rule

Answer 3

The business judgment rule is a presumption that a directors decision may not be challenged if the director acted in good faith, with the care a reasonable person in the same position, and in a manner believed to be in the best interest of the corporation.

Question 4

Duty of Loyalty Exception

Answer 4

The transaction can set aside the duty of loyalty when the interested party disclosed all material facts of the transaction to disinterest members or the shareholders thought the transaction was fair to the corporation

Question 5

Exculpatory Clause

Answer 5

An exculpatory provision can be added in the article of incorporation and limits or eliminates the director’s personal liability for monetary damages to shareholders for action taken, except to the extent that the director received a benefit to which he was not entitled, intentionally inflicted harm on the corporation or shareholders, approved unlawful distributions, or intentionally committed a crime.

Question 6

How to form a corporation?

Answer 6

File articles of incorporation with states. This needs to include the name of the corporation (with the correct Corp. Co. Limited at the end), the number of authorized shares, the address of the incorporators and registered agent, and the scope of the corporation. This means the corporations was formed de jure.

Question 7

Ultra Vires

Answer 7

Activities a corporation does outside of the scope listed in the articles of the corporation. These are not allowed and can be enjoined or directors can be held liable for authorizing the acts.

A corporation is given the power to do all things necessary and convenient to effect its purposes. A corporation can be formed for any lawful purpose. Therefore, unless something is specifically restricted it usually is within the corporation’s purpose.

Question 8

When does a corporation exist?

Answer 8

When the articles are filed by the state

Question 9

Pre Incorporation Contracts

Answer 9

Pre-incorporation contracts are valid. Entered into usually by Promoters. Promoters are generally liable for these, a corporation isn’t liable until they adopt the contract, and liability for the Promoter continues even when the corporation ratifies until there is a novation between the corporation and the third party removing the Promoter. Promoters can also be relieved of liability if the contract clearly states that they will not be bound. If it says the Promoter won’t be bound the contract is just considered an offer.

Question 10

De Facto Corporation

Answer 10

Exists when there is an incorporation statute, there was a good faith colorable attempt to comply with the statute, and there has been an exercise of corporate privileges. Have all the same rights as a corporation except in the quo warranto action by the state. Some states don’t recognize.

Question 11

Corporation by Estoppel

Answer 11

People who treat the business as a valid corporation are estopped from denying the corporation’s existence. Some states don’t recognize it. Insulates shareholders against contract but not tort liability.

Question 12

Who is liable when a corporation is not formed because of a defect?

Answer 12

People who purpose to act on behalf of the corporation knowing there was no valid incorporation are personally liable, passive investors are not.

Question 13

Piercing the Corporate Veil Doctrines

Answer 13

To pierce and make shareholders liable, the s/h must have abused the privilege of incorporating and fairness must require holding them liable
Alter Ego
Inadequate Capitalization at Inception
Perpetrating Fraud
Shareholders can be held personally liable if viel is pierced.

Question 14

Alter Ego Doctrine

Answer 14

For piercing the corporate veil:
a. Grounds—harm caused to a third party because:
1) Owners do not treat the corporation as a separate entity
2) Commingle personal and corporate funds
3) Use corporate assets for personal purposes
4) Owners do not hold meetings
b. Parent/subsidiary corporations or affiliated corporations can be held liable for
this

Question 15

Inadequate Capitalization At Inception Doctine

Answer 15

For Piercing the corporate veil: The corporation started without sufficient unencumbered capital to meet its prospective liabilities

Question 16

Perpetrating Fraud Doctrine

Answer 16

For piercing the corporate veil: corporate can’t be formed to avoid existing or limit future liabilities

Question 17

What happens when the court pierces the corporate veil?

Answer 17

Active shareholders are liable and usually, this is only for tort obligations

Question 18

What are the types of securities used to form a corporation?

Answer 18

Debts securities (bonds) and Equity Securities (stocks)

Question 19

Subscription Agreement

Answer 19

agreement to purchase shares from a corporation, a pre-incorporation subscription is irrevocable for 6 months

Question 20

Consideration for Shares

Answer 20

MBCA - Any benefit to the corporation, traditionally it was cash, property, or services already performed. Now it adds discharge of debt and promissory notes for future services.

The amount set by directors and good faith valuation for consideration received, radially shares had a par value and can’t be sold for less.

Question 21

Shareholder Voting

Answer 21

Usually don’t run a corporation on a day-to-day basis. A closely-held corporation may dispense with the board by shareholder agreement and run the corporation through a different scheme. Shareholders elect the directors, when bylaws are amended, and fundamental changes. Can’t remove directors.

Question 22

Record Shareholders

Answer 22

Shareholders who are holding stock at the record date can vote at the annual meeting to elect directors and fundamental corporate changes

Question 23

Notice of Meetings for shareholders

Answer 23

a. Annual meeting— Notice must contain date, time, and location. The meeting needs to happen earlier than 18 months before the last annual meeting or 6 months after the end of the fiscal year.

b. Special meeting—date, time, location, and purpose. Can be called by the board, the president, 10% of outstanding shareholders, or anyone in the bylaws.

The notice must be given in 10-60 days prior to the meeting and proxies are allowed.

Question 24

What if there is improper notice of a meeting to a shareholder?

Answer 24

Action can be taken to nullify the meeting. Failure of Notice of a meeting is waived when a shareholder still gets to attend the meeting and doesn’t complain.

Question 25

Proxy Vote

Answer 25

a.Written proxies valid for 11 months
b. Generally revocable unless they specifically provide otherwise and are coupled
with an interest (such as proxy gets shares after)
c. May be revoked by attendance or later appointment
d. Federal law
1) Proxy solicitations must fully and fairly disclose all material facts
2) Prohibits material misstatements and fraud in connection with a proxy
solicitation
3) Materiality—a reasonable shareholder would consider it important in
deciding how to vote

Question 26

Quorum of Shareholders

Answer 26

This is a simple majority of outstanding voting shares must be present. If a quorum is present does not invalidate if one shareholder leaves. If there is no quorum shareholder action is invalid absent a unanimous written consent.

Question 27

Approval by Shareholder Votes

Answer 27

a. MBCA—if a quorum is present, an action approved if votes cast in favor exceed votes
cast against
b. Some states require greater votes for fundamental corporate change

Question 28

Cumulative Voting for Directors

Answer 28

Cumulative voting for directors
1) MBCA allows articles to provide for cumulative voting
2) Cumulative voting is automatic in some states
3) Mechanics—shareholder can vote shares owned x number of directors being elected; can cast all votes for one candidate or split.

Question 29

Shareholder Voting Trusts

Answer 29

Shareholders transfer share ownership to a trustee who votes shares as agreed. The trustee is valid in most states for up to ten years with maximums of 15 years but they are renewable. This can be used for any purpose.

Question 30

Shareholder Management Agreements

Answer 30

Shareholders generally have no right to run the day-to-day operations of a corporation. The power is vested in the board. This is an exception used in small corporations where shareholders may agree to run the corporation in any way they can even dispense without a board.

Question 31

Shareholder Transfer Restrictions

Answer 31

Ownership Interests are freely transferable but shares can conspicuously provide for reasonable restrictions

Question 32

Shareholder Inspection Rights

Answer 32

Must give 5 days written notice and must be for a proper purpose. Can look at books, papers, and accounting records. They have an unqualified right to look at articles, bylaws, minutes, names/addresses of current directors, and annual reports

Question 33

Preemptive Rught of Shareholders

Answer 33

Right, to purchase shares to maintain proportionate ownership interest. Under the MCBA It only exists where it is provided for. It does not apply to shares issued as compensation, shares issued within 6 months of incorporation, shares issued fro consideration other than money, nonvoting shares with a distribution preference

Question 34

Direct S/H Suits

Answer 34

Enforce a Shareholder right. Recovery to the shareholder.

Question 35

Derivative S/H Suits

Answer 35

Enforce a right belonging to the corporation. Can be brought if the s/h held shares at the time of the wrong, maintains ownership through the suit, and demands the board to bring the suit first unless the demand would be futile (in some states). Can be dismissed if the majority of directors with no personal interest determine in good faith the suit is not in the best interest of the corp. Recovery to the corporation.

Question 36

Distributions to Share holders

Answer 36

Dividends or assets after dissolution. There is no right to receive unless they are declared by the board. No distributions if the corp. will become insolvent. Some shares have preferences.

Question 37

Types of Distribution Preferences

Answer 37

1) Cumulative—if the distribution is not declared or paid in a certain year, it accumulates until paid
2) Cumulative if earned—preference accumulates only if profits for the year were
sufficient to pay preference
3) Participating—receive stated preference and a share of the distribution
made to common shareholders

Question 38

Director Liability with Distributions

Answer 38

1) Director who votes for an unlawful distribution is personally liable for the excess
2) Director may seek contributions from other directors who voted for distribution
3) Directors may recover from a shareholder who received a distribution
knowing it was unlawful
4) Good faith defense—may rely on accountants or reliable officers and employees who indicate distribution is lawful

Question 39

S/H Liabilities with Distributions

Answer 39

1. Shareholders not fiduciaries—may act in self-interest
2. Exception—controlling shareholder cannot use control to obtain a special advantage at the expense of the minority shareholders

Question 40

Director Voting at Meetings

Answer 40

NO proxies allowed must have the simultaneous hearing of all directors, no notice for regular meetings, two days’ notice of date, time, and place for special meetings, there must be a quorum of directors (a majority of directors), approval takes the majority of directors present.

Question 41

Delegation of Director Voting Powers to Executive Committees

Answer 41

a. Comprised of two or more directors (in most states)
b. Exceptions: In most states, committees may not declare distributions, fill board
vacancies, or amend the bylaws

Question 42

Articles of Incorporation Limiting Liability

Answer 42

Articles may further limit or eliminate the director’s personal liability to the corporation or
shareholders except:
1) To the extent director received improper benefits;
2) For liability for unlawful distributions; or
3) For intentionally inflicted harms or criminal violations of the law

Question 43

Director Liabilities

Answer 43

Can defend suits with a claim of reasonable reliance on opinions prepared by experts or reliable employees. they must prevent corporate waste.

Directors do not have the power to bind the corporation to a contract unless there is actual authority. There is only actual authority when there was proper notice, a quorum was present, and a majority approved the action or there was unanimous written consent.

Question 44

Corporate Opportunity Doctrine

Answer 44

1) A director may not divert to himself a business opportunity within the corporation’s line of business without first giving the corporation an opportunity to act (a.k.a. usurpation)
- Usurpation is very common whenever a director learns of a business opportunity, consider whether the corp would want it. If so director must present it to the corp. If the corp. doesn’t want it then the director can take it.
2) Remedy—corporation may recover the director’s profits or force the director to
convey the opportunity to the corporation

Question 45

Indemnification

Answer 45

A corporation must indemnify (pay for the costs of a director) when the director is sued and successfully defends the case. A corporation can indemnify when the director is unsuccessful in defending but the action being brought is covered with the business judgment rule. If the director is found liable to the corporation or found to improperly benefit they can’t be indemnified. Corporations may purchase liability insurance to cover directors even if they would not be entitled to indemnification under the circumstances. Officers can be indemnified.

Question 46

Required officers in a corporation

Answer 46

MBCA: Officers described in the bylaws or as appointed by directors

In some States: 2 officers president and a secretary
A person may hold more than one office some states prohibit the president and secretary from being the same.

Presidents of a corporation have the power to enter into contracts involving day-to-day operations but not extraordinary transactions unless it is authorized by the board. The board can only authorize a president as much authority as they have themselves. A board does not have the authority to enter into fundamental corporate change without a vote of shareholders.

Question 47

Officer Appointment and Removal

Answer 47

Appointed and removed by the board. If removal is in breach, the officer is entitled to damages.

Question 48

Officer Authority

Answer 48

Officers have actual authority as stated in articles, by-laws, or given by the board. Officers have apparent authority to do whatever someone in their position normally has authority to do.

Question 49

Types of Fundamental Corporate Changes

Answer 49

Amendments to articles, mergers, consolidations, share exchanges, and dispositions of substantially all assets outside of the regular course of business

Question 50

Procedure to Change

Answer 50

1. Board resolution
2. Notice to shareholders
3. Shareholder approval
4. Articles of the change filed with the state

Question 51

Merger of Corp

Answer 51

Must be approved bt directors and shareholders unless its a parent sub merger when rights of survivors shares won’t be significantly affected

Question 52

Dissenters’ Right to Appraisal

Answer 52

Shareholders who do not like a fundamental corporate change may force the corporation to purchase their shares at a fair price if they:
1. Give the corporation notice of intent to demand appraisal rights before a vote is taken
2. Do not vote in favor of the change
3. Demand payment after the change is approved

Question 53

Voluntary Dissolution

Answer 53

If shares have not yet been issued or business has not yet commenced, a majority of
the incorporators or initial directors may dissolve the corporation by delivering articles of dissolution to the state. After shares have been issued, the corporation may dissolve by a corporate act approved under the fundamental change procedure.

Question 54

Administrative Dissolution

Answer 54

The state may bring an action to administratively dissolve a corporation for reasons
such as the failure to pay fees or penalties, failure to file an annual report, and failure to maintain a registered agent in the state

Question 55

Judicial Dissolution by AG

Answer 55

The attorney general may seek judicial dissolution on the ground that the corporation fraudulently obtained its articles of incorporation or that the corporation is exceeding or abusing its authority

Question 56

Judicial Dissolution by Shareholders

Answer 56

a. The directors are deadlocked in the management of corporate affairs, and the shareholders are unable to break the deadlock, and irreparable injury to the corporation is threatened, or corporate affairs cannot be conducted to the advantage of the shareholders because of the deadlock;
b. The directors have acted or will act in a manner that is illegal, oppressive, or
fraudulent;
c. The shareholders are deadlocked in voting power and have failed to elect one or more directors for a period that includes at least two consecutive annual meeting dates; or
d. Corporate assets are being wasted, misapplied, or diverted for incorporate purposes

Question 57

Judicial Dissolution by Creditors

Answer 57

a. The corporation has admitted in writing that the creditor’s claim is due and
owing and the corporation is insolvent or
b. The creditor’s claim has been reduced to judgment, execution of the judgment
has been returned unsatisfied, and the corporation is insolvent

Question 58

Effect of A dissolition

Answer 58

Existence continues but cannot carry out any business except for winding up and liquidating. a claim can be assessed against a dissolved corporation, even until after dissolution, to the extent of the corporation

Question 59

Claim against a disolved company

Answer 59

A claim can be asserted against a dissolved corporation, even if it does not arise
until after dissolution, to the extent of the corporation’s undistributed assets
a. If the assets have been distributed to the shareholders, a claim can be asserted
against each shareholder for a pro-rata share of the claim, to the extent of the
assets distributed to the shareholder
b. A corporation can cut short the time for bringing known claims by notifying
claimants of a filing deadline
c. Unknown claims can be limited to three years by publishing notice of the dissolution in a newspaper in the county where the corporation’s known place of
business is located

Question 60

Which has more power the articles or bylaws?

Answer 60

Articles, if there is a discrepancy between the articles and bylaws the articles govern

Question 61

Adoption of A Pre Incorporation Contract

Answer 61

Express: Resolution by the officer or directors with knowledge of the material facts
Implied: acquiescence or conduct normally constituting estoppel such as accepting the benefits of the contract if done with knowledge of material facts

Question 62

Notice of Directors Meetings

Answer 62

These happen when the board or president directions. There is a notice required only for special meetings.

Question 63

Personal Liability of Shareholders

Answer 63

The shareholder can be held liable for corporate obligations when there is no actual de jure, de facto, or estoppel corporation.

Question 64

Shareholder Voting Agreement

Answer 64

Shareholders retain both legal and beneficial ownership but someone else can vote for them, this can be used for any purpose and has a 15-year maximum.